The opinion of the court was delivered by: DUFFY
KEVIN THOMAS DUFFY, D.J.:
Saul Mauriber first brought this action against Shearson/American Express, Inc. ("Shearson"), a registered broker-dealer, and Judith LeWinter, one of Shearson's registered representatives, in March 1982. The complaint alleged in conclusory fashion that defendants had engaged in high pressure tactics and that they had made fraudulent misrepresentations in the course of selling the blue chip securities that represented his life savings. Defendants allegedly invested the proceeds in highly speculative and unsuitable securities, resulting in losses of $250,000. On defendants' motion, I dismissed plaintiff's claims under the Securities Exchange Act of 1934 and the Racketeering Influenced and Corrupt Organizations Act of 1970 ("RICO") for failure to allege the underlying fraud with particularity. I also dismissed his claims under the "know your customer" and "suitability" rules of the New York Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX") and the National Association of Securities Dealers ("NASD") on the ground that there are no implied rights of action for violations of such rules.Mauriber v. Shearson/American Express, Inc., 546 F. Supp. 391 (S.D.N.Y. August 27, 1982).
Plaintiff filed an amended complaint in September, 1982, making claims under sections 12 and 15 of the Securities Act of 1933, 15 U.S.C. §§ 771 & 77o (1976), sections 10 and 20 of the Securities Exchange Act of 1933, 15 U.S.C. §§ 78j & 78t (1976), S.E.C. Rule 10b-5 and the civil remedies provision of RICO, 18 U.S.C. § 1964(c) (1976). Defendant Shearson has moved to dismiss the amended complaint on essentially the same grounds advanced in its prior motion: first, the complaint fails to plead fraud with the particularity required by Fed. R. Civ. P. 9(b); second, the complaint erroneously assumes that there are implied rights of action under the rules of the NYSE, the AMEX and the NASD, and third, the complaint fails to state a cause of action under RICO. Shearson also moves, again, to strike what it considers to be a claim for punitive damages. Finally, Shearson asks the court to stay this case pending arbitration.
The amended complaint, although by no means a model of clarity, is a substantial improvement over the original; and because many of the allegations concern matters within defendant's knowledge, I believe the complaint states fraud with sufficient specificity to withstand attack under Fed. R. Civ. P. 9(b). Given the sufficiency of the fraud claims, I also believe that the complaint states a cause of action under RICO and that a stay pending arbitration would, as defendant concedes, be inappropriate. Finally, I believe that the complaint neither attempts to state a cause of action under the rules of the NYSE, the AMEX or the NASD nor requests punitive damages; thus, I need not address the merits of defendant's objections on these matters. Accordingly, defendants' motion is denied in its entirety. A more detailed discussion of all but the arbitration and punitive damages points follows.
For the purposes of this motion all facts are taken from the complaint, with all reasonable inferences drawn in plaintiff's favor. In January, 1980, Saul Mauriber as "of advanced age, retired from employment, and had certain physical ailments which prevented him from being gainfully employed." Over the last thirty years, he had accumulated a portfolio of what are commonly referred to as "blue chip"securities, listed by name, quantity, and date of purchase in the complaint. Mauriber depended on the dividends and interest from these securities for a "substantial portion" of his income.
Judith LeWinter was a long time acquaintance of Mauriber's. She was consequently aware of his advanced age, his physical ailments, and his inability to work. She knew that he relied on "the income earned by his investments to live on." In early January 1980, LeWinter told Mauriber that she had become a registered representative for Shearson. She asked Mauriber where he kept his stocks. When Mauriber told her he kept the certificates in his apartment, LeWinter told him that "he was foolish to do this since the certificates could be lost, stolen or destroyed." She advised him to "open an account at Shearson with her as his account executive and deposit his blue chip securities in that account."
On January 8, Mauriber opened an account by depositing a $5,000 check with Shearson. At that time, he "advised LeWinter of his financial circumstances and physical condition, and told LeWinter that since he relied upon the income earned by his blue chip securities to live on, any investments made on his behalf would have to be secure and income producing. Because of her relationship with plaintiff, LeWinter was already aware of these facts. Nevertheless, plaintiff reiterated and emphasized his investment objectives and financial needs to LeWinter."
About 7 p.m. the next day, LeWinter went to Mauriber's apartment. She explained that "someone was downstairs double-parked in a car waiting for her, and that she needed plaintiff to sign certain documents which were necessary in connection with the opening of his account with Shearson and the transfer of his blue chip portfolio into his Shearson account." Mauriber asked LeWinter "what the documents specifically provided for, and for a chance to review the documents." LeWinter, however, replied "that she had to hurry because someone was waiting, that it was necessary for her to have the documents signed that night, that the documents were a mere formality, and that he should trust her and sign the documents." Mauriber relied on LeWinter's assertion that the documents were a mere formality; he "succumbed to LeWinter's high pressure tactics, and signed the documents without being given a chance to read, reflect upon or ask meaningful questions with respect thereto."
The documents were not mere formalities. One was a Limited Discretionary Authorization and the other a Discretionary Account Information Statement. They granted LeWinter discretionary power to buy and to sell securities in plaintiff's account.LeWinter knowingly filled out the documents in an inaccurate manner. Although she knew that Mauriber had never invested in options, she wrote down that he had invested in options for ten years, and she filled out a section of the documents giving her discretion to purchase options on Mauriber's behalf. LeWinter also knew that Mauriber had never had a securities account, had only purchased blue-chip income-producing securities, that he had retained the securities in his own possession, and that he was dependent on these secure and income-producing investments for a substantial portion of his support. Nevertheless, LeWinter noted in the Discretionary Information Statement that Mauriber's investment objective was to achieve "short term capital gains involving a high degree of rish and trading activity." Neither LeWinter nor Shearson informed plaintiff that "the Limited Discretionary Authorization granted LeWinter several powers, including but not limited to, the power to act as plaintiff's agent and attorney-in-fact for the purpose of buying and selling securities in plaintiff's account, and the power to legally bind plaintiff in connection therewith without . . . consulting plaintiff prior to making any such purchases or sales."
Over the next several months, LeWinter sold all of Mauriber's blue chhip stocks. In late March, 1980, after he learned about the first of these sales, Mauriber asked LeWinter about the purpose of these transactions. LeWinter replied "that these stocks were going nowhere, were not providing plaintiff with the type of income he could earn, and that it was consistent with plaintiff's financial needs and invesment objectives for LeWinter to sell his blue chip securities and invest in securities which would earn him a greater amount of income" (emphasis added). LeWinter told Mauriber to trust her since she worked for Shearson and had access to the firm's expert research. "Throughout the time LeWinter traded plaintiff's account, and, specifically, after the sales of plaintiff's remaining blue chip securities . . . plaintiff questioned LeWinter's strategy," and she gave the same or similar responses.
With the proceeds from sales of Mauriber's blue chip securities, LeWinter traded entirely in securities that were "non-income producing and of a high risk and speculative nature." The complaint sets forth at least 117 transactions in such securities, listing the dates of purchase and sale and the names and amounts of the securities. Notwithstanding her representation that her trading activity was consistent with Mauriber's needs and objectives, LeWinter knew that all these investments were totally unsuitable for plaintiff. Mauriber claims that many of LeWinter's purchases were unsuitable not only because of the speculative nature of the stock, but because many of them were made on margin.Neither LeWinter nor Shearson informed Mauriber that "margin purchases would obligate plaintiff to make numerous cash payments to meet margin calls. . . ." Finally, Mauriber complains that LeWinter told him she had sold his Anchor Growth Fund interests for $11,000, when she had actually sold plaintiff's interest for $24,000. She used the extra $13,000 to purchase interests in the Shearson-Murray fund, a tax-shelter limited partnership, which has produced little or no income, is illiquid, "and was a totally unsuitable investment for someone in plaintiff's circumstances."
In addition to charging fraud based on these misrepresentations and omissions, Mauriber claims that under all the circumstances, the purchases and sales made by LeWinter constituted excessive trading. Including the sales of his blue chip securities, the complaint lists at least 125 sales by date and the name and amount of the security. Plaintiff claims that these sales involved 160 transactions over a twenty month period. The listed sales show that the average transaction was reversed in less than 90 days, suggesting that the account may have been turned over several times between January 1980 and August 1981.
As to both the misrepresentation and churning claims, Mauriber claims that LeWinter's conduct was "designed to, and, in fact, did, earn LeWinter and Shearson substantial commissions." The transactions were "effected with an intent to cause plaintiff losses, expenses, ...